Friday, September 9, 2011

DOST ignored lessons from ZTE fiasco

Science Secretary Mario Montejo cannot be accused of not having read the study of National Scientist Dr. Raul Fabella and former UP School of Economics Dean Dr. Emmanuel de Dios. Mr. Montejo made references to it in his memo to P-Noy. But it seems Mr. Montejo just totally ignored the lessons learned from Ate Glue’s unfortunate foray into the broadband business.

Let us look into that paper again to help us understand why Mr. Montejo’s proposal to revive a government-owned backbone for broadband services is ill-advised. The study begins with a question: “Does the Philippines need a government-owned backbone? Our answer is: No.”

The two UP economics professors declared that it is hardly debatable that providing the greater mass of people with digital access to data and communications through greater bandwidth is a matter worthy of national government attention. But they emphasized, government’s direct participation in terms of investing on it is not called for.

“Unlike the country’s physical transport and logistics infrastructure, which have been neglected for decades, the Philippines’ information and communications infrastructure has been the recipient of recent massive (mostly private) investment.”

Before the previous administration’s motives got clouded by the ZTE deal, the DOTC’s Philippine Information Infrastructure Program also envisioned the “development of a robust and expanded digital infrastructure with the private sector playing a major role”. The thrust was to enhance the inter-operability and the connectivity of all networks to attain “universal access” at affordable cost.

“The currently available broadband backbones (those of the telephone companies and the National Power Corporation) would serve to fill the country’s urgent need for ample, universal, and affordable broadband access. The brunt of the work was expected to consist of providing ‘last-mile’ and missionary connections (i.e., connections to remote and inaccessible areas).”

The UP economists emphasized that “It is essential to note that original government plans at no point envisioned a separate backbone to be financed, owned and operated by, and dedicated to the needs of the government. At worst, what was recommended was a market-mediated build-operate-and-transfer (BOT) plan.”

It is typical of “network economies”, of which ICT backbones are an instance, the UP paper pointed out, that the unit-cost of service falls with increasing capacity-utilization (measured, say by number of users). This is because fixed costs are high while variable costs are low.

“As already noted, there are now already two operational backbones, both privately-owned and -run. Increasing these to three (and possibly four) would saddle the entire industry with excess capacity that was entirely of the government’s making.

“Once implemented, the expanded NBN would steer demand away from private backbones and effectively raise the cost for all users. Even if half of government demand hives off from private providers towards the cheaper government backbone, costs become higher for the telcos’ private customers, including business.

“Ironically one of those to suffer would be government itself. For it is virtually certain that government agencies will nonetheless continue to spend the rest of their telecommunications budgets (e.g., half of their spending on landline calls and 92 percent of their cell-phone expenses) on the private telcos’ services. Therefore they too become affected by higher costs. Hence it is not even entirely assured that total government telecoms costs will even be reduced.”

The UP economists also discounted the argument about congestion. “The possibility of congestion (leading to slow connections) is likely the only valid economic rationale for an extra backbone (not to mention two), and possibly some allowance for redundancy in an emergency. At present, however, no congestion is in sight.

“Quite the contrary, current fiber-optic pipelines are hugely under-utilized, implying zero marginal cost of additional traffic. Even assuming the point of congestion is reached, however, there is no reason to doubt that private telcos would scramble quickly enough to absorb excess demand, as they did upon inter-connecting the country under competitive pressure.”

The UP economists urge government to concentrate on government’s core competence: to govern. They pointed out that indeed, “from the 1990s up to until recently, the government has been progressively outsourcing all non-core needs. Government agencies that have followed this formula have realized good savings.

“In the meantime, government concentrates on its more important regulatory task of preserving competition; then rather than bother to run a single firm, it comes to influence the entire sector. This strategy has clearly yielded more success than the previous one.” Dr de Dios, in an e-mail to me, suggests that P-Noy instead consider using government’s bargaining power as bulk or consolidated buyer to obtain more favorable broadband rates from the telcos, say through a public bidding.

A good friend of mine, a Pinoy expat in New York with telecoms investments here and abroad as far as Latin America, agrees with the general theme of the UP paper in an e-mail responding to my questions. Here are portions of his reactions:

“Yes, there’s a dark fiber in the NGCP grid which can be used by the government. But you will have to build connecting fiber links to existing PLDT/Globe/Digitel/Bayantel submarine cable landing stations (link to worldwide Internet) and buy lots of broadband equipment (Huawei, Cisco or Juniper) to ‘light up’ the dark fiber. Then you will need an army of tech people to service a nationwide network - a new set of government bureaucracy.

“Note that the NGCP grid is just an expressway. Connecting and maintaining the ‘last mile’ to each government agency or office around the country is the more expensive part. Iyon ang madugo !

“For instance, in Metro Manila the NGCP grid stops at the Meralco point of interconnection somewhere in Caloocan. Meralco then receives the power and distributes it in Metro Manila and Laguna via its electric cable network. So, how will this government broadband project distribute the Internet bandwidth to each government office in Metro Manila and Laguna from Caloocan?

“Multiply this last mile scenario nationwide; province by province, town by town and compute the cost of installation and service maintenance and the price zooms up.

“If lighted, the NGCP fiber will just duplicate the existing national microwave networks of PLDT, Globe, Digitel and Bayantel. And, there are unused capacities in these telco microwave networks which government can just lease or use for free in exchange for spectrum that the government gives to them. If necessary, PLDT, Globe, Digitel or Bayantel can increase capacities by adding broadband transmission equipment on the same microwave tower using same number of people to maintain them.

“Moreover, PLDT, Globe, Digitel and Bayantel have existing last mile connections to most government offices nationwide.

“Government should just bid out this project (network plus last mile) to our existing telco boys using Chinese equipment if a Chinese grant is seen as funding source. An open auction will be far cheaper since PLDT, Globe, Digitel and Bayantel already owns capacities various international submarine cable network which carries internet traffic worldwide.”

Interestingly, New Zealand, a country that tried putting up a government sponsored broadband network gave up on it. NZ State Services Minister Tony Ryall announced in February 2009 that the government’s Government Shared Network (GSN) is to be discontinued because it is financially unsustainable. Participating government agencies will be moved to a new provider in the private sector.

Ryall says, “The project had been running at a considerable financial loss ever since it became operational.” Dr. de Dios remarked: “You cannot accuse NZ of being corrupt or inefficient, as countries go, yet even they have not been able to make a go of a government broadband.”

Whatever the government ends up doing, it is essential that everything is done in a highly transparent manner. Assumptions on Montejo’s P800 million estimated cost, for instance, should be publicly revealed. Experts are wondering where that figure came from. The terms of reference should also be crystal clear unlike the ZTE deal in the previous regime.

In the end, the UP economists concluded “the only backbone the government needs today is a moral one; not fiber optic but fibre politique.”

Due diligence

Ruth Marbibi sent me this classic which stresses the need to always do due diligence.

After a long night of making love, the guy notices a photo of another man, on the woman’s nightstand by the bed. He begins to worry.

“Is this your husband?” he nervously asks.

“No, silly,” she replies, snuggling up to him.

“Your boyfriend, then?” he continues.

“No, not at all,” she says, nibbling away at his ear.

“Is it your dad or your brother?” he inquires, hoping to be reassured.

“No, no, no! You are so hot when you’re jealous!” she answers.

“Well, who in the hell is he, then?” he demands.

She whispers in his ear, “That’s me before the surgery.”

Boo Chanco’s e-mail address is bchanco@gmail.com. He is also on Twitter @boochanco

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FEF is a public advocacy organization dedicated to advancing the cause of economic and political liberty, good governance, secure and well-defined property rights, and market oriented reforms. It counts among its members former and present Cabinet secretaries and undersecretaries, leading figures in the academe, respected media personalities and opinion makers, and prominent members in the business and finance community.